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Were Hedge Funds Right About Souring On Diageo plc (DEO)?

Abigail Fisher

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the second quarter. We get to see hedge funds' thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Diageo plc (NYSE:DEO).

Is Diageo plc (NYSE:DEO) an exceptional investment now? Money managers are taking a bearish view. The number of bullish hedge fund bets were trimmed by 1 lately. Our calculations also showed that DEO isn't among the 30 most popular stocks among hedge funds (see the video below). DEO was in 15 hedge funds' portfolios at the end of the second quarter of 2019. There were 16 hedge funds in our database with DEO positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

DEO_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's view the fresh hedge fund action surrounding Diageo plc (NYSE:DEO).

What does smart money think about Diageo plc (NYSE:DEO)?

At the end of the second quarter, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DEO over the last 16 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Tom Gayner

The largest stake in Diageo plc (NYSE:DEO) was held by Gardner Russo & Gardner, which reported holding $246.5 million worth of stock at the end of March. It was followed by Markel Gayner Asset Management with a $232.6 million position. Other investors bullish on the company included GAMCO Investors, Arrowstreet Capital, and Fisher Asset Management.

Judging by the fact that Diageo plc (NYSE:DEO) has witnessed bearish sentiment from the smart money, it's safe to say that there exists a select few hedge funds that decided to sell off their entire stakes by the end of the second quarter. At the top of the heap, Ilan Assouline's Circle Road Advisors dropped the biggest investment of the 750 funds watched by Insider Monkey, valued at about $4.3 million in stock. Michael Gelband's fund, ExodusPoint Capital, also dumped its stock, about $1 million worth. These transactions are interesting, as total hedge fund interest fell by 1 funds by the end of the second quarter.

Let's now take a look at hedge fund activity in other stocks similar to Diageo plc (NYSE:DEO). We will take a look at GlaxoSmithKline plc (NYSE:GSK), PetroChina Company Limited (NYSE:PTR), 3M Company (NYSE:MMM), and NextEra Energy, Inc. (NYSE:NEE). This group of stocks' market caps are closest to DEO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GSK,25,1687781,-4 PTR,9,102928,-3 MMM,40,939257,-3 NEE,40,742117,4 Average,28.5,868021,-1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $868 million. That figure was $847 million in DEO's case. 3M Company (NYSE:MMM) is the most popular stock in this table. On the other hand PetroChina Company Limited (NYSE:PTR) is the least popular one with only 9 bullish hedge fund positions. Diageo plc (NYSE:DEO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately DEO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DEO investors were disappointed as the stock returned -3.9% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.

Disclosure: None. This article was originally published at Insider Monkey.

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